Samuelson: Understanding the globalization backlash

By ROBERT J. SAMUELSON

Monday

Sep 9, 2019 at 12:01 AM

WASHINGTON — The verdict of history is that the trade war that's now raging between the United States and China will lead to no good — with consequences that could go well beyond trade and threaten the world's geopolitical and economic stability.

How this plays out is anyone's guess, but we should not pretend that there is no danger in letting the conflict fester. Possible fallouts range from a gradual disintegration of the existing global trading system, to the formation of trading and economic blocs, and, at worst, to war itself.

The historical parallels are mostly sobering. During the 1990s, the widespread assumption among economists and business leaders was that "globalization" was permanent and mostly beneficial. Global flows of goods, services, money (aka "capital"), ideas and technology boosted living standards.

The process was widely seen as irreversible, "a one-way road to the future," as Princeton University historian Harold James has put it. But it wasn't, as James argued in his astonishingly prescient book, "The End of Globalization: Lessons from the Great Depression," published in 2001, at the height of the globalization infatuation.

With hindsight, it's easy to see why so many observers (including this reporter) bought uncritically into the globalization story. Much of it was and is true. In the last half of the 19th century, new technologies — the telegraph, steamships, railroads — brought countries closer together, just as new technologies — containerization, jet aircraft, fiber optics and the internet — have today.

The result was mass movements of people, goods and capital [money] across borders. The first trans-Atlantic cable was laid in 1866. Between 1871 and 1915, an estimated 36 million people left Europe, most headed for the New World, leaving countries with too many workers and entering nations with too few. Though messy and often cruel, this shift ultimately paid huge dividends in improved living standards.

Great Britain, the leading economic power of the day, maintained order through its embrace of the gold standard (which stabilized prices) and free trade (which expanded markets). "The great streams of capital, trade, and migration were linked," wrote James. "Without the capital [money] flows, it would have been impossible to construct the infrastructure — the railways, the cities — for the new migrants."

"Globalism fails because humans and the institutions they create cannot adequately handle the psychological and institutional consequences of the interconnected world," James wrote.

The collapse of pre-World War II globalization was hastened by the Great Depression, but in James' telling, it might have buckled under political pressures in any case. There was a clamor for more protectionism, more immigration restrictions and more curbs on global capital flows. Sound familiar? In 1931, Britain abandoned the gold standard; in 1932, it ditched free trade by creating preferential tariffs for Commonwealth countries at a conference in Ottawa.

Flash forward. In the first decades after WWII, the United States successfully urged its allies to liberalize trade, but support for this approach has waned.

By accident or design, the contentious trade negotiations between the United States and China will now reframe the international economic system in the context of a new century with different political and economic conditions.

According to a report by Chad Bown of the Peterson Institute, a nonpartisan think tank, the tariffs imposed by President Trump on Chinese imports into the United States have raised the average tariff to 24% from 3% at the start of the trade war and "will affect nearly everything Americans purchase from China."

Although China has retaliated against Trump's tariffs, the effect on U.S. exports may be less for two reasons, notes Bown's report: First, China has exempted 31% of U.S. exports from increased tariffs, including aircraft, pharmaceuticals and semiconductors; and second, China's tariffs seem lower than America's. (A conspicuous exception involves U.S. autos, where the average tariff is scheduled to go to 42.6%. Likewise, U.S. soybean exports are hit hard.)

It's a good guess that the new global economic system will give overt political considerations greater weight than its predecessor. Countries — including, obviously, the United States and China — will link trade benefits and penalties to their political agendas. This is a perilous path, as no doubt both Americans and Chinese have realized in recent months.

There is a powerful tension between politics and economics. Countries and their voters want to reclaim their economic sovereignty — that is, the ability to influence their economies — when technologies and markets have increasingly transferred those powers to transnational forums that defy easy manipulation. (This conflict is especially evident in Britain's Brexit debate over leaving the European Union.)

Put in the simplest terms: Both China and the United States want to be King of the Hill, instead of learning how to share.

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